EUROPE NEWS: Gear change for España

Spain has finally created a ‘bad bank’, which means the opportunity to buy property at big discounts is coming
Recent news that Spain has finally got its act together to force banks to deal with their troublesome real estate books means there is a big buying opportunity for investors taking shape at last.

It certainly took a while. Two years ago, the only deals private equity real estate firms were tending to enter into were sale and leaseback transactions with struggling savings banks such as Caja Madrid.

However, in October the government announced that banks requiring state aid must transfer problematic real estate-related assets to a new entity called the Asset Management Company for Assets Arising from Bank Restructuring (Sareb).

The creation of the new company follows a memorandum of understanding signed earlier this year between Spain, the European Commission, the European Central Bank, the European Stability Mechanism, and the International Monetary Fund on how best to deal with Spain’s banking problems.

In a statement, the Fondo de Reestructuración Ordenada Bancaria responsible for Sareb said: “The overall objective of Sareb will be the management and orderly divestment of the portfolio of assets received, maximising their recovery, over a maximum time horizon of 15 years. In pursuing its activity, Sareb has to contribute to the restructuring of the financial system, while minimising the use of public funds and any market distortions it may cause.”  

Initially structured as a single company, it will have the power to set up specific asset funds on the basis of risk-return profile of the portfolios transferred to it by the banks.

Sareb needs to raise about €2 billion of equity and is talking to eligible private sector investors about becoming majority owners.

In exchange for the assets contributed, the transferring banks may receive bonds issued by the company and guaranteed by the State. They include BFA-Bankia, Catalunya Banc, Novagalicia Banco and Banco de Valencia, which alone will move some €45 billion of real estate-related assets off their balance sheets. A second group of banks will bump this figure, though it cannot rise above €90 billion under Royal Decree. The idea is that Sareb will sell the assets on in time.

Sensing the opportunity, a handful of potential buyers are scouting deals in the country including Fortress Investment Group, KKR, Cerberus Real Estate, Lone Star Funds, and also New York’s Centerbridge Partners, which is buying a loan-serving platform in Spain called Aktua. 

Of course, the banks that transfer assets will have to take haircuts on the foreclosed real estate and loans. They will be paid a reduced amount because the bad bank is buying en bloc, and it has to bear expenses incurred by the banks, as well as the risk implied by agreeing to take on assets in the future.

However, Spain says these haircuts will be “conservative”, in that they could have been even higher. On average, the transfer value is estimated to represent a discount of approximately 63 percent on the gross book value of foreclosed assets. By asset type, the discount is 79.5 percent for land; 63.2 percent for unfinished developments and 54.2 percent for finished housing. The average discount in the case of loans to developers is 45.6 percent, including haircuts of 32.4 percent for finished projects and 53.6 percent for loans to finance urban land.  
The transfers are envisaged to begin in December. Private equity folk are now beginning to spend a lot of time in Madrid.

Asked how excited he was about Spain as an investment location on a scale of 1 – 10, a member of a prominent firm that buys real estate loans in Europe said: “Nine.”

He said: “Sareb is not being set up like Ireland’s NAMA. They are applying discounts. They will be able to bring forward product at prices that funds like ours buy at.”

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Private equity real estate firms are buying in Dublin

Ireland is three years ahead of Spain in that it set up its bad bank, the National Asset Management Agency (NAMA), in 2009. Now, amid signs that the domestic economy is improving, private equity real estate firms are increasingly buying assets in the country.

One of the latest deals reported on is the sale of State Street’s headquarters in Dublin plus an adjoining site. Kohlberg Kravis Roberts & Co (KKR), the New York firm, and London-based Delancey were in the running to buy it, but were pipped at the post by Kennedy Wilson. Meanwhile, The Blackstone Group is said to be in talks to buy Dublin’s Burlington Hotel for around €65 million. Apollo Global Management, the New York private equity, credit and real estate firm, last month also agreed to buy a package of distressed Irish property loans from Lloyds Banking Group for £149 million (€185 million; $237 million).